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Business as Usual More Risky for Electric Utilities, New Report Finds; Big Boost in Capital Spending Must Pivot to Reflect New Realities

Over the next 20 years, electric utilities will likely spend some $2 trillion - $100 billion per year - on capital investments to replace aging power plants, implement new technologies and meet new regulatory requirements.

Over the next 20 years, electric utilities will likely spend some $2 trillion - $100 billion per year - on capital investments to replace aging power plants, implement new technologies and meet new regulatory requirements.

But this spending, whether on energy efficiency, renewable energy or new fossil fuel and nuclear power plants, must reflect new global realities if utilities are to avoid adverse impacts on their own bottom lines, as well as ratepayers and investors.

That’s the conclusion of a new Ceres report, Practicing Risk-Aware Electricity Regulation: What Every State Regulator Needs to Know. The report, authored by industry and finance veterans, examines the options and finds almost without exception, the riskiest investments - the ones that could cause the most financial harm for utilities, ratepayers and investors - are large base load fossil and nuclear plants. Increasing spending on energy efficiency, distributed generation and renewable energy lowers the risk and cost of utility resource investments – as recent decisions by utilities such as Xcel and PacifiCorp show.

“This is no time for backward-looking decision-making,” said Mindy Lubber, the president of Ceres, which commissioned the report. “Diversifying utility portfolios by expanding investment in energy efficiency and clean energy reduces risk to utility customers and shareholders alike.”

“There is a lot on the line and it’s critical that utilities and regulators get it right,” said Ron Binz, the report’s lead author and a 30-year veteran of utility and energy policy, most recently as chairman of the Colorado Public Utilities Commission. “A regulator’s analysis should not stop with the levelized cost of a resource: The risk of the resource to ratepayers and investors must be considered as well. Of all the options we reviewed, nuclear power is the riskiest option and energy efficiency is the least risky and lowest cost option.”

Due to aging power plant fleets, evolving technologies and environmental regulations, U.S. electric utilities will invest at roughly twice recent levels for the next two decades. And state utility regulators will have a huge hand in how that money is spent.

“If history is a guide, fewer than 700 state regulators will serve in office during the next 20 years,” the report states. “Each regulator will, on average, vote to approve more than $6.5 billion of utility investments during his or her term.”

The report’s authors analyzed the costs and risks involved in meeting America’s power needs through a variety of strategies, from constructing large centralized power plants, to reducing demand through energy efficiency and deploying distributed generation and renewable energy sources.

The report ranks utility resources according to the long-term costs for each option, including capital, operations, and maintenance. It also ranks resources on their exposure to specific risks, from delays and overruns related to permitting and building a plant to regulatory risks such as carbon and other pollution controls and potential problems involving fuel, financing, and rate setting.

The report concludes that the energy option with the lowest level of risk and lowest costs is energy efficiency. But the authors note that utilities tend to be rewarded for supplying more power, not reducing demand.

“The cheapest, least risky power plant is the one a utility doesn’t have to build, and ratepayers don’t have to underwrite,” Binz said. “But utilities can only invest in energy efficiency when regulators make it financially worthwhile - for example by adding performance-based financial incentives for efficiency and by eliminating the financial reward for selling more electricity.”

“It falls to state electricity regulators to ensure that the large amount of capital invested by utilities over the next two decades is deployed wisely,” noted Susan Tierney, managing principal at the Analysis Group and a former Massachusetts Public Utility Commissioner who wrote the report foreword. “It is vital that their decisions reflect the needs of tomorrow’s cleaner and smarter 21st century infrastructure and avoid investing in yesterday’s technologies. Poor decisions could cost ratepayers, investors and taxpayers hundreds of billions of dollars and have costly impacts on the environment and public health.”

“As we enter yet another major construction phase in the utility sector, I worry about overly ambitious projects that create what we in the financial world call significant ‘event risk’,” added Denise Furey, a consultant and former utility analyst at Citigroup and Fitch Ratings who helped author the report. “A sizeable negative event would more than likely impact the company’s debt ratings and the costs of capital. This would not be good for the company in question, consumers and investors.”

Other lower-cost, lower-risk energy options included onshore wind, geothermal and biomass co-firing. The report also points out that costs for distributed solar PV and wind have fallen significantly since 2010, while costs for building nuclear power plants have increased in the wake of the Fukushima disaster.

“Just as having a diversified financial portfolio makes sense, so does having a diversified energy portfolio,” Lubber said. “Mixing supply and demand-side resources, distributed and centralized power generation, and fossil and non-fossil fuels – this is the best way to manage risk and keep costs down.”

Ceres is an advocate for sustainability leadership. Ceres mobilizes a powerful coalition of investors, companies and public interest groups to accelerate and expand the adoption of sustainable business practices and solutions to build a healthy global economy. Ceres also directs the Investor Network on Climate Risk, a network of 100 institutional investors with collective assets totaling more than $10 trillion. For more information, visit www.ceres.org and www.incr.com